Dyer v. Commissioner ( 1961 )

J. Raymond Dyer and Jean Russell Dyer, Petitioners, v. Commissioner of Internal Revenue, Respondent

Dyer v. Commissioner

Docket No. 82560

United States Tax Court

36 T.C. 456; 1961 U.S. Tax Ct. LEXIS 133;

May 31, 1961, Filed

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Decision will be entered under Rule 50.

1. On their return petitioners claimed as deductions $ 11,558.52 as business expenses. Of these claimed deductions, the Commissioner in his deficiency notice has allowed various items aggregating $ 1,504.75 and has disallowed items aggregating $ 10,053.77 as having been incurred by petitioner J. Raymond Dyer in a proxy fight over proxies sought by Union Electric Company of St. Louis, Missouri, of which petitioner was a stockholder. Held, not all of the $ 10,053.77 disallowed by the Commissioner was for expense incurred in the proxy contest. Held, further, that those expenditures which were so incurred are not deductible under sections 162 or 212, I.R.C. 1954.

2. In the taxable year petitioner J. Raymond Dyer incurred certain expenses in a libel suit which he brought against a St. Louis newspaper on the ground that a news article which it published and an editorial based thereon were libelous of his reputation as a lawyer. Held, such expenses are deductible as business expenses under section 162 of the 1954 Code.

3. In the taxable year petitioner and his minor daughter gave testimony in hearings before the Joint Committee on Atomic Energy in Washington, D.C., and incurred certain traveling expenses in connection therewith. Petitioner also incurred certain expenses for mimeographing copies of their testimony. Held: Such expenditures are not deductible under either section 162 or section 212, I.R.C. 1954. They were personal expenses and not deductible under any applicable statute.

J. Raymond Dyer, pro se.

William J. McNamara, Esq., for the respondent.

Black, Judge.

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BLACK

The Commissioner has determined a deficiency in petitioners' income tax for the year 1957 of $ 958.36. The deficiency is due to one adjustment which the Commissioner has made to the $ 4,336.36 loss which petitioners showed on their return for 1957. That adjustment is "(a) Business expenses disallowed $ 10,053.77" and is explained in the deficiency notice as follows:

(a) On your return for the taxable year 1957 you deducted $ 11,558.52 for alleged business expenses. Of the total amount claimed, $ 10,053.77 has been disallowed, as reflected by the following schedule:

	Deducted on	Allowed	Disallowed
	return
Labor	$ 865.10		$ 865.10
Stationery	572.52	$ 172.17	400.35
Telephone	169.16	126.36	42.80
Postage	1,158.15	58.15	1,100.00
Filing and service fees	233.20	21.00	212.20
Microfilm and IBM cards and envelopes	5,320.30		5,320.30
Brief printing	1,260.47		1,260.47
Travel expense	570.50		570.50
Transcripts and books	299.45	17.40	282.05
Rent	570.00	570.00
Depreciation	359.62	359.62
Bar, library, Assn. dues	127.00	127.00
Photos, photostats	40.85	40.85
Court parking	5.20	5.20
Professional meetings	7.00	7.00
	$ 11,558.52	$ 1,504.75	$ 10,053.77

It is held that the amount of $ 10,053.77 was disbursed by you for a fight and/or crusade by you and your daughter, Nancy Corinne Dyer, over proxies of Union Electric Company, and are, therefore, not ordinary and necessary expenses in carrying on a trade or business. Moreover, such disbursements are not ordinary and necessary expenses for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income. Accordingly, your taxable income as reported is increased in the amount of $ 10,053.77.

The petitioners by appropriate assignments of error contest the foregoing determination by the Commissioner.

FINDINGS OF FACT.

Some of the facts have been stipulated and as stipulated are incorporated herein by this reference.

1. Jean Russell Dyer and J. Raymond Dyer, sometimes hereinafter referred to as petitioner, are husband and wife and reside in St. Louis, Missouri. They filed their joint Federal income tax return for the calendar year 1957 on the cash basis with the district director of internal revenue, St. Louis.

2. Union Electric Company, sometimes hereinafter referred to as Union, a Missouri corporation with offices at St. Louis, is a public utility holding company with more than 60,000 stockholders. Union's outstanding voting securities during the year 1957 consisted of approximately 533,500 shares of preferred stock and approximately 10,300,000 shares of common stock.

3. Petitioner's controversy with Union started on June 28, 1956, when on behalf of his minor daughter, Nancy Corinne Dyer, sometimes hereinafter referred to as Nancy, and at her request petitioner protested Union's participation in the publication of a nationwide full-page atomic reactor newspaper advertisement which was published on June 13, 1956. Petitioner had purchased 100 shares of Union stock for his daughter in April 1956.

4. On November 18, 1956, Union published a two-page advertisement in St. Louis newspapers carrying the report of its president, J. Wesley McAfee, relating to Union's lobbying activities in the State of Illinois. On November 19, 1956, petitioner, on behalf of his daughter-stockholder, protested the content of McAfee's letter to the stockholders. Copies of the protest were sent to the Securities and Exchange Commission and the Federal Trade Commission.

5. On December 11, 1956, petitioner, as attorney for Nancy, demanded access to Union's stocklist and the right to copy the stocklist. Union denied the validity of the power of attorney and refused the request, contending that under Missouri law a minor could not appoint an attorney.

6. On December 17, 1956, a petition for mandamus and damages was filed in the Circuit Court of the city of St. Louis by petitioner, as the duly appointed next friend of his daughter, against Union and three of its officers, McAfee, Ralph E. Moody, and E. J. Shapiro, to require production of certain books and records of the company for inspection and copy, and for statutory damages of $ 750. On December 21, 1956, the petition for mandamus was denied. This judgment was appealed to the St. Louis Court of Appeals on January 21, 1957, and was affirmed on February 4, 1958. During the year petitioner spent $ 177.69 in connection with the appeal for the filing fee and for transcript and brief costs. Petitioner in subsequent years was reimbursed for these expenditures by Nancy. Petitioner claims this $ 177.69 as a deduction.

7. Although the petition for mandamus was denied, Union, on December 21, 1956, accorded Nancy the right to copy the stocklist. She proceeded to make copies by microfilming until January 1, 1957, when she returned to Bryn Mawr College. On December 31, 1956, she requested Union's secretary to allow petitioner, as her natural guardian, to complete the microfilming of the stockholders list since she had to return to college. About three-fourths of the stockholders list had been microfilmed at this time. Her request was denied.

8. On or about January 3, 1957, petitioner filed a suit, as natural guardian for Nancy, in the Circuit Court of the city of St. Louis against Union; two of its officers, McAfee and Shapiro; and one of its directors, Moody, seeking specific performance of a contract alleged to have been made by Union's counsel that the company would recognize petitioner as natural guardian of Nancy and grant him inspection rights in such capacity. The suit also asked for the imposition of penalties against the individual defendants under section 351.215 of Vernon's Annotated Missouri Statutes for refusal of petitioner's request. The court dismissed the suit on November 13, 1957, and notice of appeal from such judgment to the St. Louis Court of Appeals was filed on January 17, 1958. During 1957, petitioner spent $ 74.45 for a filing fee and other costs in connection with this litigation.

9. On December 31, 1956, Nancy submitted to Union three proposed changes to the bylaws of Union. The first was to bar false and misleading advertising and false and misleading communications to the stockholders, and to prohibit the expenditure of corporate funds for either of these purposes, the second was to bar unauthorized lobbying, and the third would permit minor stockholders to vote by proxy and to exercise other stock rights by power of attorney.

10. On January 3, 1957, petitioner requested access to Union's stocklist on behalf of Carmen Kern, as Nancy's attorney under power of attorney. His request was refused.

11. It is stipulated that "On January 11, 1957 petitioner purchased 250 shares of the capital stock of Union Electric Company so that he could complete the copying of Union's stock list." The price which petitioner paid for the stock is not shown in the stipulation but that fact is, of course, not an issue in this case. On January 14, 1957, petitioner was permitted to complete Nancy's microfilming of Union's stockholder list. Petitioner finished the microfilming in a few days and paid for it, advancing Nancy the amount necessary to pay for the part she had done herself. The cost of microfilming the shareholders list, the transferring of the information to IBM cards, and one addressing run on a post card was $ 5,320.30. Petitioner deducted this amount on his 1957 income tax return and contends it is an allowable deduction.

12. Petitioner and Nancy testified before the Joint Congressional Committee on Atomic Energy on February 28, 1957, in Washington, D.C. The hearings were being held under section 202 of the Atomic Energy Act. Petitioner paid his own and Nancy's travel expenses in the amount of $ 228.71. He also paid $ 41.05 for mimeographing 50 copies of their testimony.

13. On February 21, 1957, petitioner sent a letter to Union enclosing a proposed communication to the stockholders. In the letter petitioner requested that Union mail such communication to its stockholders, or, in the alternative, supply him with an up-to-date stockholder list. Union complied with the latter alternative. On February 27, 1957, petitioner filed with the SEC a schedule 14-B statement. The filing of such statement is prescribed by Rule 14-A-11(c) of the SEC's proxy regulations and is required from each participant in a proxy solicitation.

14. On or about February 27, 1957, the SEC issued its order under section 12(e) of the Act, which provided, inter alia, that Union and all other persons were prohibited from engaging in a proxy solicitation regarding the voting of any of Union's securities at the regular annual meeting to be held on April 20, 1957, except pursuant to a declaration which the SEC, by order, permitted to become effective. Notice of this order was given to petitioner personally on March 1, 1957, and also by telephone and by registered mail.

15. On or about March 8, 1957, petitioner ordered the printing of a 5x7-inch post card which he intended to send to Union stockholders. The front of the card bore petitioner's name and address and the line "Stockholder Democracy -- Stockholder Responsibility." The back of the card was printed "If you can keep your head when others all about you are losing theirs THEN maybe you don't understand the problem." The cost of printing these cards was $ 400.35 which petitioner paid. On or about March 15, 1957, petitioner ordered the checking of his and Nancy's IBM card file of Union stockholders against the stockholders list Union had furnished to him after his demand of February 21, 1957. For this service petitioner paid $ 157.50. Petitioner claims the amounts described in this paragraph as deductions in his 1957 return.

16. Pursuant to the order of the SEC, Union filed its amended declaration, which included its proposed proxy statement and form of proxy ballot. The proposed proxy statement and form of proxy included, for a vote of stockholders at the scheduled annual meeting, eight proposals submitted or sponsored by Nancy and petitioner. Union was opposed to seven of these proposals and took no position on one, but included these proposals in the management proxy material in compliance with the SEC's proxy regulations.

17. Pursuant to the SEC's order, a hearing on Union's amended declaration was held on March 13-15, 1957, in Washington, D.C. Petitioner attended this meeting on his own behalf as a stockholder and as attorney for Nancy. On March 16, 17, and 18, 1957, petitioner consulted with his counsel in New York City and together they wrote a brief, which he filed with the SEC on March 20, 1957. Travel and miscellaneous expenses in connection with this trip, as well as the cost of the brief and the transcript of the hearing, in the total amount of $ 569.23 were paid by petitioner and deducted on his income tax return for 1957.

18. On March 21, 1957, the SEC issued its order permitting Union's declaration of proxy material, including its posteffective amendments to become effective. On March 23, 1957, petitioner contacted Multi-Mail, Inc., a St. Louis mailing service to arrange for the printing of a post card and its mailing to stockholders of Union.

19. On March 26, 1957, petitioner addressed a letter to the director of the SEC's division of corporate regulation enclosing copies of the post card. By letter dated March 27, 1957, the director of the division of corporate regulation advised petitioner that, under the circumstances, the mailing of the post card would constitute a solicitation of proxies and that it would be unlawful for him to mail the same without compliance with the SEC's order of February 27, 1957.

20. On March 22, 1957, and March 25, 1957, Union sent telegrams to the SEC containing a letter and an amendment thereto which it proposed to send to its stockholders. The letter commented upon motive behind the activities of petitioner and solicited return of the management proxies. This soliciting material was approved by the SEC for use by Union.

On March 23, 1957, petitioner ordered printed on the front of the post cards an additional message in manuscript form which read as follows:

Dear Stockholder:

Have you been keeping score on Union Electric? Truth is the problem. I have filed with the U.S. Court of Appeals objections to the SEC's approval of management's proxy solicitations. I think truth will prevail.

/s/ J. Raymond Dyer

At the same time petitioner ordered the post cards addressed and stamped. The charge for printing the additional message was $ 113.54, for addressing and handling was $ 273.86, and for postage was $ 1,135.40, all of which was paid by petitioner and claimed by him as deductions on his 1957 return.

21. Petitioner commenced mailing the post cards to the stockholders of Union the afternoon of March 29, 1957, and the mailing was completed shortly thereafter. By telegram dated April 3, 1957, petitioner advised the SEC that the mailing of the communication by him involved no violation of any order.

22. Petitioner and Nancy filed their petition for review of the SEC's order of March 21, 1957, with the United States Court of Appeals for the Eighth Circuit on March 29, 1957. On the same date they filed an application for a stay of the SEC's order. The application for a stay was argued on April 8, 1957, and was denied on April 9, 1957. By opinion handed down on January 24, 1958, the question presented by the petition for review was held to be moot and the petition to review was dismissed. In May 1958, petitioner filed a petition for writ of certiorari with the Supreme Court of the United States. On May 18, 1959, the petition was granted and the judgment of the United States Court of Appeals for the Eighth Circuit was vacated and the case remanded to the Eighth Circuit for further consideration. On October 12, 1959, the Supreme Court entered its order to retax one-half of the costs of the certiorari proceeding against Union. The remanded case was argued and submitted on November 17, 1959, and is still pending before the Eighth Circuit. During the year 1957 petitioner made various expenditures in connection with this litigation in the total amount of $ 1,031.17 and claimed the amount as a deduction on his return for that year.

23. On April 1, 1957, petitioner and Nancy filed suit in St. Louis Circuit Court against Union, McAfee, David R. Calhoun, and Benjamin M. Loeb, Union's proxy agents, wherein they sought a writ of mandamus to compel Union to issue revised proxy cards containing all of plaintiff's proposed bylaw changes, as well as an injunction against the three above-named individuals enjoining them from voting any proxy cards not containing all of plaintiff's proposed bylaw changes. Union's proxy cards had been mailed to the shareholders with its notice of annual meeting of stockholders on March 25, 1957. The suit was held moot on appeal. During the year 1957, petitioner made various expenditures in connection with this litigation in the total amount of $ 341.70 and he deducted this amount on his 1957 income tax return.

24. On April 9, 1957, the SEC filed a complaint in the United States District Court for the eastern district of Missouri seeking equitable relief against petitioner. The SEC sought a temporary restraining order and a preliminary and final injunction against defendant's use of the mails or other instrumentalities of Interstate Commerce to solicit proxies, or otherwise engage in a solicitation in connection with the April 1957 shareholders meeting of Union without first complying with its order of February 27, 1957, requiring approval of declarations and proxies. By order entered July 28, 1958, the complaint was dismissed on the ground that the action was moot. On August 7, 1958, petitioner filed a motion to vacate the order and for a new trial. By order dated November 16, 1959, the District Court permanently enjoined petitioner from soliciting proxies of other Union shareholders, or permitting use of his name for such solicitation, unless he previously complied with the filing requirements prescribed by the SEC and except pursuant to effective declaration. Notice of appeal to the United States Court of Appeals for the Eighth Circuit was filed May 6, 1960, and is presently pending; the appeal also embodies the dismissal of petitioner's counterclaim. During the year 1957, petitioner made expenditures in connection with this litigation in the total amount of $ 41.41. Petitioner claims this amount as a deduction for 1957.

25. On April 12, 1957, petitioner filed suit in the United States District Court, St. Louis, Missouri, against Union, the Globe-Democrat Publishing Company, and Richard H. Amberg. The suit was for an injunction against the publication of alleged libelous material against the plaintiff in the St. Louis Globe-Democrat newspaper. The suit grew out of a news article and an editorial, published March 14, 1957, and March 15, 1957, respectively, which petitioner alleged were libelous of him. The petition was dismissed April 15, 1957, and an appeal to the United States Court of Appeals, Eighth Circuit, was taken but not perfected. During the year 1957, petitioner made expenditures in connection with this litigation in the total amount of $ 134.60. Later, petitioner filed suit in the St. Louis Circuit Court against the Globe-Democrat Publishing Company and Richard H. Amberg, its publisher, seeking $ 100,000 compensatory damages and $ 100,000 punitive damages. That case, No. 17677, is presently pending. No expenses connected with this suit are claimed as deductions by petitioner in this proceeding.

OPINION.

As has already been stated, the Commissioner has disallowed $ 10,053.77 of the $ 11,558.52 which petitioners deducted as business expenses on their joint income tax return filed for the year 1957. With respect to the $ 10,053.77 which he has disallowed the Commissioner stated in his deficiency notice as follows:

It is held that the amount of $ 10,053.77 was disbursed by you for a fight and/or crusade by you and your daughter, Nancy Corinne Dyer, over proxies of Union Electric Company, and are, therefore, not ordinary and necessary expenses in carrying on a trade or business. Moreover, such disbursements are not ordinary and necessary expenses for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income. * * *

In contesting the determination of the Commissioner, petitioners rely upon sections 162 and 212, I.R.C. 1954. ^{*151 It seems manifest to us that not all of the $ 10,053.77 disallowed by the Commissioner can be properly characterized as having been disbursed by petitioner in a "fight and/or crusade by you and your daughter, Nancy Corinne Dyer, over proxies of Union Electric Company." We think it would be well to determine at the outset just how much of the expenditures in question should be included as expenditures made in the proxy contest with Union.}

Petitioner contends that none of such expenditures can properly be so characterized. He lays stress on the fact that he and his minor daughter were not seeking proxies for themselves but were merely opposing the signing of proxies by stockholders of Union, granting their proxies to the management of Union. So far as we have been able to ascertain from the record that statement is correct. But at the same time it seems plain that petitioner was doing what he could to prevent the granting of proxies to Union's management. That may have been his right and privilege but in so doing it seems to us that he was engaging in a proxy "fight and/or crusade" as the Commissioner has termed it in his deficiency notice, and the question is whether in so doing the expenditures which he incurred and paid are deductible under either of the sections of the 1954 Code upon which petitioner relies.

Petitioner's business was that of a practicing lawyer. He was an investor to some extent in stocks but there is no evidence that his business was that of trading in stocks -- he was merely an investor. It seems clear to us that his expenses incurred in the proxy contest with Union were not ordinary and necessary expenses incurred and paid in his business as a lawyer. Therefore, we think that such expenditures are not deductible under section 162. Would they be deductible under section 212? We think that question must be answered in the negative on the facts in this case. Section 212 provides that --

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year --

(1) for the production or collection of income;

(2) for the management, conservation, or maintenance of property held for the production of income; * * *

It seems clear to us that the expenditures in question would not come within the language "for the production or collection of income" as provided in (1) above. Do the expenditures fall within the provisions of (2) above? Petitioner purchased 250 shares of Union in January 1957 possibly for the purpose of his "proxy fight." The shares, of course, had value and paid dividends. Under these circumstances do these expenditures by petitioner in this proxy contest qualify as having been expended "for the management, conservation, or maintenance of property held for the production of income"?

In Revenue Ruling 56-511, 2 C.B. 170">1956-2 C.B. 170, it was ruled that "transportation and incidental expenses" by a stockholder in attending meetings of companies in which he owns stock are nondeductible personal expenses. "The taxpayer, by reason of his investment activities, is not deemed to be carrying on a trade or business" and "the expenses of attending the stockholders' meetings are not considered to be sufficiently related to the taxpayer's investment activities to warrant their deduction * * * as expenses incurred for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income."

As we have already said, the expenses which we are now considering were not ordinary and necessary expenses of petitioner's business as a practicing lawyer. Neither do we think that they were sufficiently related to petitioner's investment activities as a stockholder of Union to warrant their deduction as expenditures incurred and paid for "the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income."

We hold, therefore, that such expenditures were personal in nature and therefore not deductible either under section 162 or 212. The expenditures upon which we are now ruling are described in paragraphs 6, 8, 11, 15, 17, 20, 22, 23, and 24 of our Findings of Fact.

The facts with reference to the expenditures in the libel suit are given in paragraph 25 of our Findings of Fact. The expenditures in 1957 for this libel suit by petitioner were $ 134.60. Petitioner claims this amount as a deduction under section 162. Petitioner testified with reference to his libel suit, among other things, as follows:

This suit which has been heretofore referred to as having been filed in the United States District Court against the Union Electric Company and the Globe-Democrat Publishing Company alleged the concerted action of the defendants in causing the publication of that editorial, and sought an injunction against further libels. The hearing was held April 15, 1957, and the petition was dismissed that day under the case of Near versus Minnesota, decided in 1931 by the United States Supreme Court in a five to four decision, as reported in 283 U.S. 697">283 U.S. 697, on the ground that the plaintiff had an adequate remedy at law. Appeal to the United States Court of Appeals, Eighth Circuit, was taken but was not perfected. Instead, Mr. Dyer filed suit in the St. Louis Circuit Court against the Globe-Democrat Publishing Company and Richard H. Amberg, its publisher, seeking $ 100,000 compensatory damages and $ 100,000 punitive damages. * * *

We think the $ 134.60 expenditures in this libel suit is deductible. See Paul Draper, 26 T.C.201 (1956).

The substance of petitioner's testimony as to this libel suit was that the purpose of it was to protect his reputation as a lawyer. The news article published by the Globe-Democrat and its editorial based thereon are in the record, but we do not deem it necessary to incorporate them in our Findings of Fact. It is not our function to decide whether or not the publications complained of were libelous or not. It is sufficient to say that petitioner claimed that they were libelous and there is nothing in the record which would justify us in questioning his good faith in making that claim. On authority of the Draper case, we hold that the $ 134.60 which petitioner incurred and paid in the libel suit was a business expense and is deductible under section 162.

Our findings of fact with reference to the claimed deduction of the expenditures in connection with petitioner's testimony before the Joint Congressional Committee on Atomic Energy are embodied in paragraph 12 of our Findings of Fact. Petitioner's appearance before this Joint Committee had no connection with his proxy contest with Union; that much seems certain. Also, it seems clear to us that these expenditures would not be deductible to petitioner as an ordinary and necessary business expense under section 162. Petitioner's business was that of a lawyer and his testimony before the congressional Joint Committee had nothing to do with his practice as a lawyer. Nor do we think it was deductible under section 212. Petitioner's testimony before the Joint Committee plainly was not for the production or collection of income nor was it for the management, conservation, or maintenance of property held for the production of income. As a matter of fact, petitioner seems to concede that his expenditures incurred and paid in connection with his appearance as a witness before the Joint Committee were not deductible expenses either under section 162 or 212. In arguing for the deductibility of these expenses, petitioner says in his brief, as follows:

The testimony given was given in the Joint Committee's Sec. 202 Statutory Hearings. See cover and face page of Ex. 5. Sec. 202 of the Atomic Energy Act of 1954 requires the Joint Committee, during the first 60 days of each session of the Congress, to conduct hearings "for the purpose of receiving information concerning the development, growth and state of the atomic energy industry." If the expenses of witnesses who are called upon to testify in those statutory hearings are declared nondeductible income tax wise, the Joint Committee will be greatly handicapped in securing the voluntary attendance of witnesses. It will have to subpoena them, thus incurring additional expense. Subpoena expenses for Sec. 202 hearings are not contemplated in the Joint Committee's budget.

Petitioner volunteered to testify before the committee -- he was not subpoenaed by the committee. While his voluntary appearance before the committee to testify may have been altogether commendable on his part, we have been cited to no statute which would allow the deduction claimed by petitioner and we know of none. We sustain the Commissioner in his disallowance of these expenditures.

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 162. TRADE OR BUSINESS EXPENSES.

  (a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including --

  * * * *

  (2) traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; * * *

  SEC. 212. EXPENSES FOR PRODUCTION OF INCOME.

  In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year --

  (1) for the production or collection of income;

  (2) for the management, conservation, or maintenance of property held for the production of income; * * *↩